QVC Group Inc (QVCGA) 2004 Q3 法說會逐字稿

Good day everyone, and welcome to the Liberty Media Corporation conference call. Today's call is being recorded. During this presentation we may make certain forward-looking statements about business strategies, market potential, future financial performance, new service and product launches and other matters. These statements involve many risks and uncertainties that could cause actual results to differ materially from such statements, including, without limitation, possible changes in market acceptance of new products or services, competitive issues, regulatory issues, and continued access to capital on term acceptable to Liberty Media. Please refer to the publicly filed documents of Liberty Media Corporation, including the most recent Form 10-Q, for additional information about Liberty Media and about the risks and uncertainties related to Liberty Media's business.

At this time, for opening remarks and introductions, I would like to turn the conference over to the President and Chief Executive Officer, Mr. Robert Bennett. Please go ahead, Mr. Bennett

Thank you very much. Good morning, everyone, thank you for joining us today. Also all on the call we have Bill Costello, who is QVC's COO, CFO and President of their International operations, and Barb Bennett, Discovery's Executive Vice President and CFO. Joining me here in the conference room are a number of Liberty representatives, as well as Bob Clasen, Starz! Encore's President, and Bill Myers who is Starz! Encore's CFO. Following our usual format, I'm going to spend a few minutes discussing the third quarter financial results for Liberty, as well as for our three large private businesses, QVC, Starz!, and Discovery. I'll also touch on some balance sheet and liquidity highlights before opening the call up for questions.

In general, we're quite pleased with the overall results in the quarter. We had very solid revenue growth at each of our large private assets. QVC and Discovery turned in excellent operating cash flow growth, and we're pleased with the continued revenue in subscriber growth trend at Starz!. Our smaller businesses also did well with significant achievement at Ascent, Court TV, and GSN and important new hotel deals for On-Command. Let's take a look at some of the specifics now.

On an overall basis for the three months ended September 30th, 2004, consolidated revenue was 1.8 billion, and consolidated operating cash flow was almost 350 million. We closed on the QVC acquisition in September of 2003, and began consolidating QVC's results at that time. Accordingly, the prior year's number aren't really comparable, however, this will be the last quarter we don't have comparable prior year consolidated numbers with respect to QVC. Looking at the numbers on a combined basis, which counts 100% of all of our subsidiary and equity basis affiliates, and therefore is more comparable from period to period, revenue was 2.5 billion, which is a 14% increase over the same quarter of last year. Operating cash flow was 545 million, a 23% increase over last year.

Our InterActive group generated revenue and OCF growth of 12% and 16%, respectively. At the Networks Group, revenue increased by 15%, and OCF increased by 30%, as a result of very good growth at Discovery on the OCF line, offset by the expected decline of Starz! Encore associated with increases in programs cost. Excluding Starz! Encore, the Networks Group revenue grew by 16%, and OCF by 55%. We're very pleased, obviously, with the third quarter revenue and OCF trends, and, while these represent a modest slowdown from the very strong results we had in the second quarter, the results are, nevertheless, very solid. Year-to-date revenue growth is 16%, and combined OCF growth is 22%. QVC, Starz!, and Discovery are the primary drivers of the growth, and I'll discuss them in more detail in a moment.

I would like to point out that several of our smaller businesses are also contributing significantly to this growth. Ascent Media had year-to-date revenue and OCF growth of 25 and 29%, respectively. Court TV year-to-date and OCF growth was 16% and 10%, respectively. And GSN has grown year-to-date revenue by 19%, and has generated 4 million of OCF versus break even in the third quarter of last year.

Looking now at QVC. QVC grew their consolidated revenue by 12%, and OCF by 16% over last year. As has been the case all year, QVC's International Operations were especially strong. All three of the international markets are benefiting from expanding distribution, increased orders, and higher selling prices in U.S. dollar terms, and each of the three international businesses approximately doubled their OCF in the quarter. The domestic operations experienced a little bit of a slowdown in growth from what we had seen the first half of the year.

Year-to-date results remain strong, but third quarter growth was slower, or was a little lower, as a result of more difficult prior year comps, lower average selling price, as we had higher shipments of apparel and accessories, versus jewelry and home products, which generally have higher average selling prices, increased costs associated with customer service, and a slight reduction in the gross profit margin. While there, obviously, are external factors that affect QVC's business, management is the first to point out that execution is ultimately responsible for the results, and our team there led by Doug Briggs, Bill Costello, and Darlene Daggett, remain focused on improving the execution and bringing up the top line sales growth number.

On the international side, we've seen international operates hold their OCF margins in a 16 to 17% range for four consecutive quarters now. This compares to the 11% margin in the third quarter of last clear. And, while we don't necessarily expect that the international margins, the OCF margins will reach the, sort of, 22, 24% levels that we see in the U.S., however, based on the experience so far, it looks like margins in the very high teens ought to be achievable. Full year 2004 revenue guidance remains unchanged, and we increased full year OCF guidance to growth in the high teens, up from mid to high teens.

Now let's move over to Starz! Encore. Subscription units at Starz! continue to grow across all three categories, with Starz! and Encore subs each growing 14% over last year. Freematic(ph) and other subs grew by 17%. Over the last 18 months, Starz! has signed new affiliation agreements with 7 of the 9 largest cable companies, including Comcast, Cox, Charter and Adelphia. These agreements generally provide for better packaging, more agressive sales campaigns and rollout of Starz! On Demand, and over the last six months, we've begun to see the result of these efforts. Due in large part to the increased subscriber levels, Starz! increased revenue by 13%, and Starz! Encore now serves a total of more than 167 million subscription units.

OCF was 62 million in this quarter, compared to 72 million for the same quarter of last year. The decline is due primarily to a $40 million increase in programming costs, as well as higher sales and marketing expenses associated with the aforementioned marketing campaign. Starz! also announced a new rebranding campaign designed to simplify the Company's identity, and more clearly emphasize their array of offerings. This campaign will take effect in March of next year. We did not change our full year guidance for Starz!. However, we do expect to be at the upper end of the range, full OCF guidance was increased to between 225 and 235. We're doing that because of the results year-to-date, and we've been trending towards the lower end of the range with respect to the expected increase in programming costs this year.

I should point out, though, that Starz! also has benefited in the first three quarters of the year from approximately $15 million in one-time items, including 4 million in the third quarter. So, accordingly, while we're pleased with the results, you still need to bear in mind that next year, while we're expecting a very solid year this year, next year's might be somewhat lower because we have still one more year of significant programming cost increases. After that, those programming cost increases begin to moderate significantly, and if we can continue to maintain the sort of revenue growth we're seeing, we ought to begin seeing significant OCF growth after 2005.

Looking at Discovery, on a consolidated basis, Discovery's revenue increased by 18%, which was approximately in line with year-to-date trends, and operating cash flow increased by a very strong 58%. Increased revenue is principally due to domestic affiliate revenue growth, in both advertising and affiliate revenue growth for the international networks. Domestic affiliate revenue is being driven primarily by a combination of free subs converting to paying subs, as well as reduced launch support amortization associated with the extension of affiliation agreements.. International affiliate revenue growth was due to subscriber gains and international ad revenue, which increased 24%, was due to subscriber gains, as well as positive trends in the advertising markets, and several of the international markets. The domestic ad revenue was impacted by some difficult comparisons. A soft scatter market and ratings declines at The Learning Channel, more specifically with respect to Trading Spaces. The Trading Spaces franchise is still very solid, however, it faces very difficult comparisons to last year's record ratings.

Strong OCF growth for both the domestic and international network divisions helped drive overall OCF growth, as did a decline in OCF losses at the other divisions, namely, International Ventures and Consumer Products. The domestic business was very effective at controlling costs, particularly personnel and G&A expenses, reinforcing the flexibility of Discovery's cost structure. International operating cash flow continues to benefit from scale economics, as operating costs are spread over a larger subscriber base. Our guidance for Discovery is unchanged. As you've heard from many other media companies, the fourth scatter market is uncertain, and therefore we are being somewhat cautious about the fourth quarter results, because it's just very difficult to predict in this soft scatter market.

Now, let me recap a few of the nonoperating related highlights for the third quarter. At the beginning of the quarter, we repurchased approximately 120 million shares of our own stock from Comcast. We paid for the shares by exchanging our ownership interest in the International Channel and E, as well as approximately 545 million in cash. We continue with the debt reduction program that was announced last year, and now, including debt repurchase through total return swaps, we've substantially completed our $1 billion debt reduction target for 2004.

As many of you have probably noticed, last week we announced the transaction in which we entered into a total return swap on approximately 85 million shares of News Corp. Voting stock. Assuming that we receive the necessary government approvals, we expect to acquire those shares from Merrill by delivering News Corp. Nonvoting shares. Assuming this occurs, our 17% voting interest will roughly coincide with our economic interest. The News Corp. Reading Corporation, and the potential S&P inclusion created a unique opportunity to convert some of our nonvoting shares into voting shares at attractive prices, and given our large ownership position, we felt that we needed to take advantage of that opportunity.

There has been a lot of speculation surrounding this transaction. I would like to make it very clear that we view ourselves as allies of News Corp. and the Murdock family, and that we have no hostile intentions. We are large, happy, friendly shareholder, given the voting position and the shear number of nonvoting shares that we hold, we understand why News Corp. elected to install their shareholder rights plan, and we're not surprised by it, nor troubled by it. Our relationship with News Corp has not changed, our investment in News is still strategic, and I expect it will continue to have open and regular dialogue with our colleagues at News Corp. going forward.

Now, I'll conclude my formal remarks by quickly looking at our liquidity position. At September 30th, the total of the our cash and nonstrategic public portfolio was $10.7 billion, compared to total debt at face of $11.5 billion. Our cash and liquid investments decreased during the quarter by approximately 600 million. This is primarily due to the 545 million cash portion of our share repurchase from Comcast, as well as cash used for debt reduction. The declines were partially offset by cash generated from our consolidated subsidiaries, most specifically, QVC, as well as cash received for the settlement of financial instruments.

Debt declined by approximately 300 million during the quarter, as a result of the debt reduction program that I mentioned earlier. We continue to view our balance sheet as essentially debt-free on a net basis. We have 10.7 billion of value in cash and nonstrategic public holdings, and 11.5 billion in debt at face, that leaves approximately 800 million of net debt, which can easily be covered by the approximately 1.5 billion of consolidated OCF that we expect to generate this year. And that does not include any of the approximately 11 billion of News Corp and IAC stock that we hold.

Looked at another way, we could sell the entire nonstrategic public portfolio, pay the taxes, use the net proceeds to pay down debt, and have a debt to operating cash flow ratio of only about 2.5 times, and, again, that does not include the 11 billion of News and IAC stock. Now, we're not planning to do that, because it's not particularly tax efficient, but it does illustrate how low our effective leverage really is.

In summary, our large private operating businesses continue to perform very well. The first half of the year was strong, and we're quite pleased with the results year-to-date and in the third quarter. Our liquidity position remains very strong. We're comfortable with our debt position, and our ability to service our debt, as well as our ability to take advantage of acquisitions and other opportunities as they arise.

This concludes my formal remarks, and now I will turn it over to the operator for your questions. Thank you.

Thank you, Mr. Bennett. The question-and-answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the star key followed by the digit 1 on your touch-tone telephone. If you're joining us on a speakerphone, please be sure that your mute function is turned off to allow your signal to reach our equipment. Once again, that is star 1, if you would like to ask a question. Our first question will come from Vijay Jayant with Lehman Brothers.

Thank you. One of the key teams that's been evolving recently is the prospect of some form of liquidation at Liberty to unlock value. Could you talk about one if there is any sort of urgency on that front to unlock value, and if so, what sort of form that might take?

Well, as we've been saying for some time now, really throughout the year, that we view our stock as being substantially undervalued, and that it does not reflect the value of our businesses, and the growth that is inherent in our businesses, and we have, for quite some time, been looking at and investigating alternatives to try to illustrate more clearly to the market and try to get better value in our stock, and we've taken a number of steps in that direction. Those have included continuing to simplify, to try to simplify, focusing on our operations, spinning off the LMI assets, the debt reduction program. So, we've taken a number of steps already, that we think are steps in the right direction towards making the Company easier to see and understand, and, therefore, making it easier for our shareholders to receive the value that's intrinsic in the stock. That being said, we continue to investigate whether there might be other transactions or structures or events that would lead to better visibility of the assets, and better valuation of the assets. That's an ongoing process, nothing is particularly imminent. It's a process of analysis that we continue to work on.

Thank you.

Our next question will come from Doug Mitchelson with Deutsche Banc Securities.

Thank you very much. Discovery questions for both of the Bennetts. For Barb, your peers, I think, particularly at MTV and Turner Networks before had much stronger (indiscernible) growth for the third. Can you give us any more color behind the 2% growth? I know, Dob talk about a tough scatter market, but, are you doing worse than your peers, or is the ratings, in fact, that great at GLC? And then for Dob, to the extent that Cox does choose, at some point, to liquidate it's Discovery interest as part of it's privatization process, do you feel you've got the ready financial capacity to be able to execute on that transaction?

Do you want to go first, Barb? Sure. Doug, the ratings challenges that we were experiencing in third quarter of '04, was mostly driven by, as Dob mentioned the Trading Spaces franchise. Last year, third quarter and fourth quarter, that particular program was peaking in terms of its normalized cycle of a program, so, as we were experiencing 4.0's in fourth quarter of last year, we even got a 7.0 on a particular program. We're not seeing quite the high level of ratings on that particular show, although, it is still continuing to do very well for us. So, TLC and the Trading Spaces has certainly been experiencing the challenges. Also, in terms of the trending, any given quarter there could be different specials that appear in one quarter that perhaps don't have the -- that is not repeated in the next year's quarter. For instance, last year we had Nefertiti resurrected, and the best shark week ever, in last year's third quarter, and we did not have the specials of that magnitude this time. However, we are expecting to have some good (indiscernible) in fourth quarter. On your other question, Doug, you know, we have not had any indication from Cox that they, you know, have a need or desire to sell their interest, but, you know, I think that matter of the point I was trying to make earlier in discussing our liquidity, we feel that we definitely have ample capacity to take advantage of opportunities that arise, and that's certainly, if that were to arise, would be an opportunity that we would look to take advantage of, and we're quite comfortable that we have the resources to do that.

I wasn't sure if it was tax efficient for you to do it in your current situation, but it sounds like it is. Thank you.

Okay.

And we'll now hear from Niraj Gupta with Citigroup.

Thank you, and good morning. A couple of questions. One, I was -- you know, speaking of nonexcuses, question for Bill. How much of the slowdown in revenue growth at domestic at QVC was just due to tough comps? Maybe you could just give us a little bit of color on that, Bill? And then just on -- I just have one follow-up after that, thanks.

Okay. I would say a very, very small piece was due to tough comps. It's just that, you know, there are a few things in the business that we think we should be doing better, in terms of delivering a better product to the customer, and I say that not because I think our product offering is bad, but because the customer hasn't responded. We think our viewership is there, it's certainly demonstrated when we put on the right products, people flock to the phone, and we've had some tremendous days in the the quarter, but we know from that, it's not so much a viewership issue as a product offering, and it's something we have to continue to work on. Some quarters are going to be a little bit stronger than others, some weaker, and we were disappointed in the results, and I think Dob hit it on the head when he said the management team here really attributes, primarily, to better execution on our part than any external factors.

Thanks, Bill. And Barb just on Discovery, you know, in spite of the relatively soft advertising growth, obviously the affiliate fees more than made up for it, I was wondering if you could give us more color on what the networks were that weren't getting a cash payments from distributors were that are now getting significant payments? If you give us some color on that, that would be great.

Yes, most specifically, Niraj, it's the emerging networks. They -- as digital boxes have rolled out, they have rolled out with it, and free previews have -- are starting to roll off, so, it's largely in those emerging networks. Somewhat on travel, but mainly on the emerging networks. And certainly, you have the lower amortization expense that we're getting to experience and realize due to the contract renewals that Dob mentioned.

Thank you.

And our next question will come from Bishop Cheen with Wachovia securities.

Good morning, Dob and everybody. Dob, I always enjoy that presentation and do not disagree with it when you go through your net debt and your cash flow coverage of net debt. When you do that for the ratings agencies, what kind of response do you get? And then I have a follow-up.

Well, you know, you would probably be better off asking the ratings agencies. I mean, I think they're -- they're -- part of the issue we have is we're a bit of a hybrid. We've got operating businesses, and we've got investment businesses, and I think in general, when they're looking at asset coverage, they look for higher ratios than we might think are necessary, whereas, on a debt to cash flow multiple basis, you know, I think there's a general consensus of around what a reasonable level is. On a -- on an asset coverage ratio basis, I think they, in general, look for higher coverage than we -- you know, than what I've described here, which is basically one to one. They're looking for something higher than that in general.

That nonstrategic portfolio, do they give you push back on how much it would cost to unwind that portfolio?

I'm sure, you know, there's some element of the time to liquidity and the friction cost to liquidity, and that's probably part of why they don't necessarily look at it and say, Okay, if you've got a billion dollars of Sprint stock, we'll count that as a billion dollars of cash. You know, that is different from cash.

Right. Okay. And then you said, you're essentially, you know, satisfied the billion-dollar debt reduction commit this year. Does that mean that in the remainder of the less than 60 days, you don't anticipate any more be debt reduction calendar '04?

We have -- you know, we've met our debt reduction obligation. I guess, you know, if there are opportunities arise, we may take advantage of them, but we've met our commitment for this year.

Okay. And we have another billion to go next year, if I remember correctly?

That's the plan.

Okay. Thank you, Dob.

You're welcome.

Moving on to Kathy Styponias with Prudential.

Hi, thanks. Question regarding, I guess, strategy, Dob. In light of your goal to try to unlock value for shareholders, do you see yourself as a net acquirer, or net settler of cable network assets? And, in relation to that, where are you in the process of hiring someone to oversee the networks. You've been looking now, I believe, since May, the process seems to be taking a while. Where are you in the process, and why has it been taking so long? Thanks.

On the net acquirer, net disposer question, I would consider ourselves to be a net acquirer, potentially, but it depends on what becomes available, and, you know, we have things in the works that we've been looking at and working on, and so we continue to see opportunities out there, and, you know, to the extent that we can find things that make sense, potentially we will be a net acquirer, particularly, building around the core businesses that we already have, meaning Starz!, Discovery, QVC. If we can find businesses that make sense in the context of those businesses that will expedite their growth or expand their franchises. Those are things that we're interested in doing, and continue to look at doing. In terms of bringing someone on to head up that group, that hopefully is not too far away. We've -- it has been a process that has been, you know, delayed for any number of reasons, that I don't necessarily feel like going into in public, but it's a process that continues, and I would expect to wrap up relatively shortly.

Thank you.

And we'll now hear from Tuna Amobi with Standard and Poor's.

Thank you. Good morning. Just a quick question on the total return swap. I was just wondering, you know, Mr. Bennett, in in the interest of the comment you made about, you know, maintaining an open dialogue with News Corp., one of their points was that, you know, you didn't approach them to talk about this deal, and obviously that raises the question of, you know, what your ultimate intention might have been. So, I was just kind of looking for some more -- you know, some more comments as to, you know, what this development, you know, might mean for your investment in News Corp., and what you were looking at down the road before they came out with their plan. Thank you.

Well, our objective was fairly straightforward, which was recognizing that there was going to be a -- you know, in the exclusion of the News Corp. voting shares from the -- certain Australian indices, there would be a supply of voting shares that would be available for us, and that the spread between the voting and the nonvoting has come down considerably, and we saw an opportunity to buy a large block of voting shares, and we had the thing structured so that once we, subject to getting the appropriate government approvals, will be able to settle that with nonvoting shares, and we expect that the nonvoting shares, given the expected inclusion of News Corp. In the U.S. indices should trade up, and therefore, it was an opportunity to buy voting shares while they were cheap, and hopefully pay for them with nonvoting shares that will become more expensive. That was the principal motivation, given sort of the sensitivity of the trade, we did not feel that it was appropriate, or we had reservations about notifying the company in advance, and didn't think that was necessarily the right thing to do. There have been several subsequent conservations between Dr. Malone and Mr. Murdock, you know, in the past week they've had several, you know, friendly and cordial conversations, and, as I said before, I expect we'll continue to have conversations. But, what we saw principally, was an opportunity to align, more closely align, our voting interest with our economic interest on extremely favorable terms.

Okay. You said that you might settle that transaction in cash or marketable securities. Are you -- what's the chance that you will actual settle that transaction in cash at this point?

It could go either way. We'll have the right to do either.

Thank you.

You're welcome.

Andy Baker with Cathay Financial has the next question.

Thank you, very much, and congratulations on a great quarter. A couple of quick questions. One, having met your commitment to shareholder of paying down a billion dollars worth of debt, and still having considerable cash flow generation in the the rest of the year, any chance that you would going to the market and buying back stock? Second is, at some point next year, I guess the profitability of QVC and Starz! Encore is going to make it such that you become a tax paying entity, I believe. Could you address that a little bit more? And third, is there any rationale in which you could see voting in favor of News Corp. poison fill?

We bought a bunch of shares back from Comcast at the beginning of the quarter. We have had a program of selling (indiscernible) out there, and so, you know, given the right opportunity, I wouldn't rule out buying more shares, buying shares back. Our tax projections have us starting to pay meaningful amounts of tax, sort of in 2006. So, it's not currently an issue, but obviously, always something that we're paying attention to, and at some point, that's the price of success, but it does, you know, create a desire to try to find ways to shelter that. And the third question? I don't know. We'll -- I guess that won't come up for vote for another year, so we'll reassess. I expect -- I think what News Corp. said is that the board of directors was going to reassess in 30 days, and, you know, I would expect that, you know, the dialogue that we have will continue, and we'll see where we are, and if there are, you know, things that are mutually advantageous, or not, you know, we'll just see what happens, but it's way too early to protect what may happen in terms of voting for the fill.

Thanks. Is there any, I mean, reason why it would be bad for you? If you just swapped out your -- if you were able to get the shares to buy enough voting shares, and just swap out your nonvoting shares, you effectively could get to, probably, around 47, 48% interest, and then effectively have control of the company. Is there any reason why that shouldn't be a plan that you would pursue? Why that would be bad for Liberty and it's shareholders?

Well, it's not a plan that we are pursuing. I mean, I think we are cognizant of the fact that we have lots of nonvoting shares that could be converted, but ,as I said at the beginning, we view our relationship with News Corp. As being a productive one, and one that has been good for both of us over a long period of years, and we have all the respect in the world for the Murdock family, and for Peter Chernin, and the management team at News Corp., and, you know, we don't have, you know, hostile intentions. We're simply taking advantage of an opportunity that we saw in the market, and you know we'll see what the future brings.

Thanks a lot.

You're welcome.

Moving on to Keith [Fosset] with Merrill Lynch.

Hi, it's actually Jessica Reif Cohen. Just to follow up on all of these News Corp. question, I have one more then two more separate. Dob, given everything you've said, your last comment was that you might find something mutually advantageous. I'm just wondering, you know, ultimately, do you sell your stock back to News Corp., can you do that tax efficiently, or is it more like you exchange assets, or swap stock for assets? Secondly, could you discuss the potential about striking a deal with Sprint for their tower business, what the timing might be? And then for Bill, I had a question on QVC's international operations. Dob just said that you expected margins to peak in the high teens versus low 20s for the U.S. Just wondering why there would be such a big difference in ultimate margins?

Want to answer that one first, Bill?

Sure. It's two things. One it's more expensive to do business overseas. Just to give you an example, cost of a transponder in Germany is much higher than it is here in the United States. Also, wages and operating costs. And then, two, probably the more key one is the leverage factor. You know, no matter how high they go over there, we have three different sets of overhead, three different unique organizations, and none of them are going to get to be $4 billion. So, the leveraging factor is much less apparent on -- on the smaller size, number one, and the increased operating costs, number two.

On your News Corp. question, Jessica, I'm not going to speculate about anything. I mean, we're -- as I said, we're supportive and friendly shareholders. We own a big block of voting stock, and a big block of nonvoting stock. There's no reason that that necessarily ever needs to change. That can be the status quo forever, or, you know, we could, in the ordinary course, come up with other transactions, which we could have anyway. So, I don't -- I don't want to add any fuel to the speculations about what's going on, or what might happen, or might not happen. On the Sprint tower process, you know, there is a process, and I don't know, I can't say, you know, exactly when it will end. It's -- there's the potential for us to convert some Sprint shares into an operating business, and that is something that we think is, you know, if done on the right terms, could be attractive for our shareholders, and I think that's probably about all I'm allowed to say, given that we have confidentiality agreements.

Thanks.

And we'll now hear from Robert Routh with Jefferies and Company.

Yes, good morning. Three quick questions. At the last shareholder meeting, John actually mentioned that we shouldn't be surprised if we see him form more entities like Liberty Media international in the not-too-distant future, and I notice now, obviously, your reporting InterActive Group, Networks Group and Tech Ventures Corporate. I'm wondering whether or not we should be expecting in the next 12 to 24 months a Liberty InterActive or a Liberty Networks type entity formed, or whether that kind of an entity formation has even entered the minds of senior management at this point, because, it seems like you have tons of options at this point with respect to those various business units. Second, I was wondering if you could comment a little bit about what happened to the Yucoma(ph) block of stock, word was that Liberty was holding was not a LBTYA that never quite was sold, and whether or not you still hold that stock, or what's going on there, and finally, I'm wondering when you repurchase the L stock from Comcast as part of that transaction, if you could comment on what happened to the LBTYA stock that they would have had at that time.

Okay. That's a lot of questions. I'll try to take them in order. The probability of a spinoff or something of one of those groups, you know, I don't know. It's -- as I said earlier in this conversation, you know, we are always looking at whether holding our existing group of assets in some other form, or whether that's distributing it to our shareholders, or doing something else with it, if we think that would in the aggregate create value for our shareholders, that's something we would, and do consider. Nothing is imminent, so -- and if we decided that something along those lines made sense, we wouldn't necessarily do it directly along the lines that we have, you know, broken out, those might be logical lines, but they might not, kind of depending on what we come up with, if we come up with something. So, I'm not trying to be unduly or unusually opaque, but it's hard to answer the question.

So anything is possible?

Yeah, I wouldn't necessarily say, A, we haven't committed to do anything, other than do our best to try to maximize our shareholder value, you know, in the medium to the long term, and B, we wouldn't necessarily divide along one line, any given line. On the Yucoma shares, we ended up retaining shares after we spun off from LMI, given their tax constraints that prohibit us from selling those shares to LMI, they are not -- since we have spun off our international assets, they are not particularly strategic to us, but we are -- you know, we believe that the company, that Yucoma is a good solid company with good prospects, and we're not in any giant hurry to liquidate them. We may sell some over time from time to time, but simply because it's not strategic, but that's not in any way an indication of our confidence in the company or its prospects. Comcast continues to hold the LMI shares, the LBTYA shares that they got in the spinoff, the shares that we repurchased were only the L shares.

Great. Thank you very much.

You're welcome.

And Janco Partners, Matthew Harrigan has our next question.

Two questions. Firstly, when you look at the early returns at how Discovery's portfolio is performing, and free video on demand, and HDTV environment and the ratings you're getting, is there any sense that over time that's going to filter through to your CPMs and your rating, in other words how you perform on a relative basis? And then secondly, your comments on the international QVC margins being somewhat constrained by the scale of the markets, does that work against going into the united globalcom markets for QVC anytime soon? I know you've made the point that your blocking and tackling is strong enough that you don't feel compelled to get a first move or advantage, but I'd still like to get a further feel for the timeline there?

Yeah, I don't think there's necessarily a corelation between the maximum margin, which we don't necessarily know yet, but it seems logical from the point that Bill made, just from a scale point of view, it seems logical that those margins outside of the U.S. are going to tend to be lower in countries that don't have the scale of the U.S., I don't think that's necessarily a constraining factor on going into other countries if they seem like they are otherwise attractive markets. Obviously, the bigger the market, the bigger the potential margin, but you can still make pretty good money at a lower margin. Bill, I don't know if you want to add to that? It certainly helps. It makes it easier to look at it, but I don't know if it's necessarily the deciding factor.

I think that's right on target. I think the more primary fact -- I mean, you know, 18, 17, 18% given the margins are very attractive. This business can certainly be successful on substantially less than that. I think, though, the key, though, in looking at international markets is the size of the multichannel home universe, so, I think that's our key criteria when we evaluate and look at markets. In other words, how many homes can we get in. Obviously, the fewer number of homes you get, the less your EBITDA percentage is going to be, because you're going to have a higher fixed cost structure to support a lot less sales. So, the first criteria that we look at in terms of external or international markets is number of homes, and then what are the opportunities of us getting those homes, and then, you know, what's the disposable income of the group, what is the culture, et cetera, et cetera, but the key, though, is number of homes.

Thanks. And then on Discovery?

I'm sorry, could you restate the Discovery question?

Basically, now that you're getting, I guess, a little bit of critical mass on free video on demand, and you've got, you know, pretty ample HDTV distribution, do you get a sense that Discovery is really outperforming relative to some other networks, and that over a period of time, over a period of years, at least, that's going to filter through to your results in terms of CPMs, in terms of getting higher ratings, and outperforming in a stronger demographic that advertisers would covet?

I think that Discovery is going to be driven by -- like any network, by the quality of its shows, the quality of its programs and it's branding, and I think Discovery has consistently high-quality programs, and a high-quality brand, and doing things like HDTV and VOD only serve to, I think, emphasize the quality of the brand. So, obviously, I mean, the reason why we make the investments that we make in programming is to -- and in the quality, and consistently high quality, is to ultimately drive the value of the brand and drive the attractiveness to advertisers. So, certainly we hope that all of those things come together. I don't know if you can specifically point to one thing and say, you know, this will directly result in higher CPMs in the future, but it's sort of the whole package, of HDTV shows, big specials, of lots of awareness in the community, and high quality programming is what ultimate will drive it. And, Barb, I don't know if you have something to add to that? Well, just that we are already getting increased CPMs, although we did have a tough revenue comp for the quarter, we are getting increased CPMs, and we firmly believe that the VOD and the HDTV that we are offering, and will continue to offer, is going to be -- continue to be an extremely attractive offering on a consumer basis.

Thanks Barb, thanks Dob.

Our next question comes from Robert Shipman with CS First Boston.

I think it's pretty clear financial flexibility is high and no bondholder is going to argue that, but what we are generally concerned about are really the optics of the rating agencies, and your ability to convince both S&P and Moody's to stay low triple B. What are you willing to do, if anything, to maintain low triple B ratings, if they threaten double B, or do the optics just not matter? It clearly matters to the way paper trades. And just secondly, real quickly, have you bought back any public debt year to date, and specifically any in the third quarter? If so, what issues? Thanks.

I'm not in a position, really, to go into the details, what we have as part of the billion dollars, most of that was public debt in one form or another. I can't tell you exactly what -- you know, what individual bonds we purchased, but I think effectively all of it came out of publicly-traded bonds and notes of one class or another. On the, you know, the optics question and the agencies, you know, all we can really do is tell our story. We think that we have tremendous growth businesses that are both throwing off increasing amounts of free cash flow, and we have a portfolio of stock that is appreciating in value. We have -- we embarked on a plan to deal with some of -- with the near term maturities issue, which was a concern to us, and we have made substantial progress towards that. We met the objectives we set out for last year and for this year, and expect to do so next year. And that's, I think, really, you know, all we can do. We are quite comfortable with our leverage position. That's why we did the debt reduction program in the first place, was to convince ourselves that we could meet the near-term maturities, and work our way through, what was a bit of a bubble, you know, in our maturities schedule, and we've been substantially successful in that. So, I mean, I think all we can really do is continue to make the arguments, continue to perform as a company, and, you know, the bonds will trade where they will, and the rating agencies will, you know, make the determinations they make. But, I think, as I said, we're really ultimately, the management and the board of directors have to be comfortable with the capital structure of the Company, and I would tell you that I we are comfortable today with the capital structure of the Company.

Great. Thank you so much.

You're welcome.

As a reminder, it is star 1 if you would like to ask a question. And we'll go to Stewart Rossmiller with Merrill Lynch.

Thank you. I guess we've heard you guys talk about maybe spinning, if it improves the visibility, to equity investors, or potentially being on a consolidator of cable network programming. Do you think you could achieve those goals with maintaining access to the investment grade debt market, or is it something that may not be of that much importance as you guys go forward?

I can't give you one answer to that, because, I don't know, you know, what opportunities might arise, or in what context they might arise, or how big they are, or where we would be at the time. We feel like today we have the resources to take advantage of opportunities, and we would do so if we felt that those were important to our long-term -- to our strategic position, and to, you know, ultimately the value of our shares. Always in the context of an appropriate capital structure. You know, we're not going to go crazy. We're not crazy. We want to sleep at night. But, ultimately, if we are comfortable with our capital structure and opportunities arise that are, you know, we think important to our strategies and important to our businesses, then we will probably feel compelled to take advantage of them.

Okay. Thank you.

You're welcome.

That does conclude the questions at this time, Mr. Bennett, I'll turn the conference back to you for anyone closing or additional remarks.

Okay. Thank you. I don't have any additional remarks. Thank you all very much for your questions, and for your time today. And we'll talk to you next year sometime. Bye.

Thank you, Mr. Bennett. That does conclude today's conference. On behalf of The Liberty Media Corporation, I would like to thank you for your participation. You may now disconnect.